United States: Personal Property Tax And Preparation Of The Personal Property Statement

Originally published in 2001

A. INTRODUCTION.

Business Personal Property is Taxable; Household Goods are Exempt. All property in the state is subject to property taxation, both real and personal, unless exempted by the Arizona Constitution. There is no blanket exemption in the Constitution for personal property but there is one for "household goods." See Arizona Constitution article 9, section 2. What is left for taxation is non-household goods -- business personal property.

B. INVENTORY AND INTANGIBLES.

Inventory. Stocks of raw or finished materials, unassembled parts, work in process or finished products constituting the inventory of a retailer or wholesaler located within the State and principally engaged in the resale of such materials, parts or products, whether or not for resale to the ultimate consumer, are exempt from taxation. Arizona Constitution article 9, section 2.

The inventory of a manufacturer or manufacturing establishment located within the State and principally engaged in the fabrication, production and manufacture of products, from raw or prepared materials, are exempt from taxation. Arizona Constitution article 9, section 15.

Intangibles. The Arizona Constitution does not specifically exempt are not subject to property tax under the existing state taxing structure because there is no adequate method for equalizing intangibles and no procedure for collecting the tax on intangibles. See Maricopa County v. Trustees of Lodge No. 2, 52 Ariz. 329, 80 P.2d 955 (1938). See, also, Honeywell Information Systems, Inc. v. Maricopa County, 118 Ariz. 171, 575 P.2d 801 (App. 1977) (computer software is not subject to the personal property tax because there is no legislative method of equalization or collection). However, see MCI Communications Corp. v. Arizona Department of Revenue, et al. (Tax Court No. 90-00934), in which the Arizona Tax Court held that the intangible assets of a telecommunications company could be taxed distinguishing the Honeywell and Lodge No. 2 cases.

Possessory Interests. Possessory interests in the real and personal property of federal, state, county and municipality governments were subject to property tax as unsecured personal property. See former A.R.S. § 42-681 and following. However, 1995 legislation (Laws 1995, Ch. 294, HB 2337) repealed the possessory interest taxation provisions, effective January 1, 1995. Beginning in 1996, the possessory interest tax was replaced by the government property lease excise tax, which is based generally on the size and age of the building. It is not a property tax but an excise tax. See A.R.S. § 42-1901 and following.

Personal Property of Centrally Valued Taxpayers. The Arizona Department of Revenue centrally values the property of certain industries. That valuation process includes both the real and personal property of those industries. One important element of the personal property component of centrally valued properties is that even personal property which is leased by a centrally valued taxpayer and used by it in its operations will be taxed to the centrally valued taxpayer/lessee. See, Opinion of Attorney General 180-110 (leased property used in a producing mine is to be assessed by the Department of Revenue against the mine owner and classified as a class one property). In the non-centrally valued property area, the owner of personal property which is on lease will be responsible for the personal property tax, not the lessee.

C. REAL PROPERTY VERSUS PERSONAL PROPERTY.

Physical Annexation. The Arizona Department of Revenue, Personal Property Manual, states that "the typical characteristics that distinguish personal property from real property are the manner and extent to which the item is annexed to land or improvements, how the property is used and the intent of the property owner." The guidelines provide that property is physically annexed "if it is attached, embedded, permanently resting upon land or improvements, or is attached by other means that are normally used for permanent installation. If the item cannot be removed without substantially damaging it or the real property with which it is being used, it is considered to be physically annexed".

Constructive Annexation. The guidelines provide that property not physically annexed to real property is constructively annexed "if it is a necessary, integral, or working part of the real property. The item is constructively annexed to real property if the non-attached item is:

Intent. The guidelines provide that the intent of the property owner, the lessor, or the lessee is a significant test of classification, with intent being "measured with, not separately from, the method of attachment or annexation. If the appearance of the item indicates that it is intended to remain annexed indefinitely, the item is real property for tax purposes. Intent may also be determined on factors other than simple visual appearance. An oral or written agreement between parties, such as a contract between lessor and lessee, is binding for purposes of determining intent".

Personal Property Manual Examples. The personal property manual provides examples of typical categories of property, with an indication of whether the item is real property or personal property. As an example, built-in air conditioning is real property, but window units are personal property. See the attached excerpts from the personal property manual.

D. PERSONAL PROPERTY RETURNS.

The Report. Personal property taxation involves a return reporting procedure. There are two forms. The first is DOR 82520, the "Business Personal Property Statement," and the second is DOR 82520A, the "Agricultural Business Personal Property Statement." All taxpayers that receive such a form from the county assessor are required to complete it and return it. A.R.S. §§ 42-15052 and 15053.A. The form must be completed and returned on or before May 1 of each year, except for unsecured personal property, which form must be completed and returned to the assessor within 45 days of receipt of the form. See A.R.S. § 42-15053.A and B. Copies of these returns are contained in Appendix A.

Penalties. A 10% penalty is added to the value of the property for the particular tax year if the taxpayer fails to prepare and submit the return to the county assessor. A.R.S. § 15055.C and D. There is an additional 10% penalty if upon audit, it is determined that property was not reported on the statement. A.R.S. § 42-15053.E. A knowing failure to list property or otherwise falsify information on the personal property return is a class 2 misdemeanor. A.R.S. § 42-252.A.

Audits. The county assessor is authorized to conduct audits of personal property statements. A.R.S. § 42-15055.A.

E. VALUATION OF PERSONAL PROPERTY.

Personal property is valued using the original cost, less depreciation method. The original cost of the personal property is reported on the personal property statement, along with the year of acquisition. The appropriate depreciation table, for the type of property involved, is then applied using a "percent good" factor to the original cost to come up with the value of the property for the given year. Most personal property has a residual value, or floor (e.g., 20%). This is a fairly mechanical approach, with one of the more key elements being the application of the appropriate depreciation table. The depreciation tables and guidelines for personal property valuation are set out in the Personal Property Manual, published by the Arizona Department of Revenue.

F. SECURED PERSONAL PROPERTY.

General. There are two types of personal property for property tax purposes. The first is "secured personal property" and the second is "unsecured personal property." Secured personal property means nothing more than personal property whose tax liability is "secured" by real estate. Unsecured personal property is personal property whose tax liability is not secured by real estate.

Definition of Secured Personal Property. Secured personal property is personal property owned by a person who also owns real property in the same county valued at $200 or more. All property on the secured roll, both real and personal, is viewed as a unit. The secured personal property and the real estate is liable for the tax of the other. The result is that the personal property is "secured" by the real property. The County can look to both the real and personal property to satisfy the tax liability. See A.R.S. § 42-17154. The basic test for placing personal property on the secured roll is the determination that the real property has sufficient value to secure both the real and personal property taxes.

Valuation of Secured Personal Property. The assessor values secured personal property after the personal property statement is filed, which is on or before May 1 of the tax year. The assessor does not send a Notice of Valuation of the secured personal property to the property owner prior to the issuance of the tax bill. The tax bill for secured property, is a single bill, with an entry for the personal property and another entry for the personal property. The bill separately states the valuation of the secured personal property. Secured personal property taxes are assessed and become delinquent at the time as real property taxes. The first half taxes are due October 1 and are delinquent after November 1 and the second half taxes are due March 1 and are delinquent after May 1.

Lien. Secured personal property taxes are a lien on the personal property assessed. A.R.S. § 42-17153. The lien has priority over all other liens and encumbrances except those of the State. A.R.S. § 42-17153. The lien arises, as liens on real property, as of January 1 of the tax year (which is a calendar year). Secured personal property taxes are also a lien on the real property which secures the personal property tax liability. See A.R.S. § 42-17154. This lien though is junior to prior perfected security interest on the real property. See Attorney General Opinion No. 66-18 (March 24, 1966). Secured personal property taxes, unlike unsecured personal property taxes, are not a personal liability of the owner.

Appeals. There is a statutory glitch when it comes to appealing secured personal property valuations. There is no particular statutory procedure, as there is with unsecured personal property appeals. Nevertheless, the counties and the Board of Equalization allow an administrative appeal to be pursued, using the same timetable and procedures as that for unsecured personal property. (See the following section which deals with unsecured personal property tax appeals.)

G. UNSECURED PERSONAL PROPERTY.

Definition of Unsecured Personal Property. When the county assessor determines the valuation of the personal property of a person owning real estate within the county of a value of less than $200, the assessor will enter the valuation on the unsecured personal property tax roll. A.R.S. §§ 42-19002.A and 15056. The assessor may also enter property on the unsecured roll if the assessor determines that the value of the real property is not sufficient to cover the tax liability for both the real and personal property. See A.R.S. § 42-15056. The normal situation for unsecured personal property involves a business that leases its plant or office facility. Since the business does not own the building or land where it is operating, all of the personal property at that location, office furniture, manufacturing equipment, etc., will be taxed as unsecured personal property. What about the situation where the business has two locations? It owns one and leases the other, both within the same county. Will the personal property at the leased premises be taxed as unsecured personal property or secured personal property? The statute does not make such a distinction. It refers only to real property with a value of $200 or more within the county. Thus, such a business should be entitled to have the personal property at its leased premises taxed as secured personal property, assuming the value of the owned premises is great enough to cover the tax liability of the real property and personal property.

Assessment. Unsecured personal property taxes may be assessed by the county assessor during any month of the tax year. After receiving the personal property statement, the assessor will value the personal property and then will issue a "Valuation Notice and Tax Statement." That notice will show both the value of the personal property and the amount of the tax due. This notice is issued by the county assessor prior to the first Monday of the month the unsecured roll is to be certified. See A.R.S. § 42-19006. No later than the second Monday of the following month, the County Treasurer is required to make the unsecured personal property roll of the preceding month available and the taxes on that property become due and payable on that date. A.R.S. § 42-19104. The unsecured personal property taxes are delinquent 30 days thereafter. A.R.S. § 42-19104.

Appeals. The administrative appeal for unsecured personal property taxes is divided into three steps, with the fourth step being an appeal to the Arizona Tax Court. The time frame is compressed.

H. DIFFERENCES BETWEEN SECURED AND UNSECURED PERSONAL PROPERTY.

Tax Rate. The tax rate used for secured personal property is the tax rate for the current year used for real property. The tax rate for unsecured personal property is the tax rate for the prior year. A.R.S. § 42-19101.B.

Payment. Secured personal property taxes are payable in two installments, just the same as real property taxes. However, unsecured personal property taxes must be paid in one lump sum.

Personal Liability to Owner and Successors. While secured personal property taxes are a lien against the property, both real and personal, unsecured personal property taxes, in addition to being a lien against the personal property, are a personal liability of the owner and all of the owner’s successors and assigns. A.R.S. § 42-19117.A.

Assessment Date. Unsecured personal property taxes can be assessed during any month in the year. See A.R.S. § 42-19006. On the other hand, secured personal property taxes are assessed at the same time and in the same manner as real property taxes.

I. SPECIFIC VALUATION PROCEDURES AND BENEFITS FOR PERSONAL PROPERTY (WHETHER SECURED OR UNSECURED}.

Personal Property Construction Work in Progress is Exempt From Taxation. Both secured and unsecured personal property construction work in progress is exempt from taxation until the construction work has progressed to a significant degree for the personal property to be used. Once the property is placed in service and is being used, it will generate income, at which time it will be subject to tax. Prior to the time that it generates income, there will be no tax. See A.R.S. § 42-15065. "Personal property construction work in progress" means the amount spent and entered on the taxpayer’s accounting records as of December 31 of the preceding calendar year as construction work in progress.

Accelerated Depreciation for Personal Property. An accelerated depreciation schedule is available for class three (commercial or industrial) and class four (agricultural) personal property. To encourage capital investment in Arizona, the legislature has adopted a four-year accelerated depreciation schedule for class three and class four personal property. The 1998 legislature increased those accelerated depreciation factors, beginning in the 1999 tax (calendar) year. The accelerated depreciation factors are as follows:

See A.R.S. § 42-13054.

Residual Value. The minimum value prescribed for class three personal property is reduced by 2-1/2 percentage points per year for tax years 1996 through 1999. The minimum percent good is reduced from the current 20% to a 10% floor (which is the residual value at which the personal property, after all depreciation, will be valued at). See A.R.S. § 42-13055.

Exemption For Personal Property -- First $50,000. In the November 1996 general election, the voters approved an amendment to the Arizona Constitution which exempts the first $50,000 by value of personal property from taxation. This exemption is applicable beginning from and after December 31, 1996 (in other words, it applies to the 1997 calendar year). The exemption applies only to personal property in Class 3, commercial and industrial, and Class 4, agricultural. It does not apply to personal property in other classifications, such as Class 1, mining properties, or Class 2, utilities properties.

The Department of Revenue must increase the maximum amount of the exemption on an annual basis to take into account inflation. Specifically, on or before December 31 of each year, the Department is to increase the maximum amount of the exemption for the following tax year based on the average annual percentage increase, if any, in the GDP price deflator in the two most recent complete state fiscal years. "GDP price deflator" means the average of the four implicit price deflators for the gross domestic product reported by the United States Department of Commerce or its successor for the four quarters of the state fiscal year. Exemption amount for 1998 is $51,140. See A.R.S. § 42-11127.

Expansion of $50,000 Exemption to Each Location. Senate Bill 1007, Chapter 3, Laws 1998, further elaborated on the $50,000 personal property exemption. It expands the exemption to include each location, rather than restricting the exemption to each taxpayer. Thus, a taxpayer with multiple locations, except leasing companies and local telecommunications property, will be entitled to the $50,000 exemption at each location where its personal property is located. This legislation is effective from and after December 31, 1998, so the multiple location exemption will not apply until the 1999 property tax year. See A.R.S. § 42-11127.

Reporting Requirements For The $50,000 Exemption. For 1998, a taxpayer with personal property valued at $51,140 or less, must still file the personal property statement and fill out the "affirmation of property statement and claim of exemption" section claiming the exemption for the first $51,140 full cash value of personal property. Beginning in 1999, taxpayers who receive the personal property reporting forms sent by the assessor will not be required to report Class 3 or Class 4 personal property which is exempt from taxation up to $50,000 ($51,140 for 1998), pursuant to Article IX, Section 2, Arizona Constitution. Accordingly, for 1999 and thereafter, a small business with personal property less than the exempt amount, need not go through the trouble of completing and filing the personal property statement with the county assessor each year. See A.R.S. § 42-15053(C)(2).

J. VALUATION OF CLEAN ROOMS AS PERSONAL PROPERTY.

Laws 1997, Ch. 61 (S.B. 1050) clarifies the historical administrative practice of valuing and assessing clean rooms as personal property and to clarify the intent of the legislature that this historical practice should be continued. This legislation establishes a new A.R.S. § 42-15066 which provides as follows:

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